A mortgage is a special kind of loan – money we borrow from a bank from a bank – that we get to buy some property – a house or flat. Obviously, buying a house is expensive so you might get a £200,000 mortgage. We also say you take out a mortgage for £200,000. A mortgage is usually a very long-term loan and it’s paid back over 25 years – or 20 or 30 or whatever.
As with other loans, you pay interest on a mortgage, but it should be less than with short-term loans or credit cards. At the moment in the UK most people have to pay between 2% and 5% interest on their mortgage. Sometimes the interest rate varies according to whether the central bank of a country sets a different interest rate, but if you make a deal with your bank, you may sometimes get a fixed rate of interest for a number of years.
Most people pay the bank back through monthly mortgage payments – so people will often say my mortgage is £700 a month or £800 or whatever. People might also say I’ve got 60,000 pounds left on my mortgage (they’ve paid some back, but they need to pay 60,000 more). Or you might say I’ve got 11 years left on my mortgage. Finally, there comes a day when you finish paying and you can say I’ve paid off my mortgage and the house is yours.
However, of course things can go wrong – maybe you lose your job, or you get ill and you might fall behind with your mortgage payments because maybe you miss a month or stop paying altogether. This is the big downside of a mortgage because the property acts as security for the loan. That means that if you can’t keep up with the payments, the bank can legally repossess the house. In other words, they can make you leave the house – they can throw you out of the house – and sell it to someone else in order to recover their money. In recent years, this has become a big problem in lots of countries because of the recession, which has led to unemployment increasing.
So what do you have to do to take out a mortgage? Well, obviously you have to apply for a mortgage. You will usually have to book an appointment at the bank and talk to the manager or talk to an adviser. When you talk to them, you might fill in a form with details of your income and outgoings – in other words, what you earn and what you spend. You will probably need proof of these like a wage slip from the place you work or bank statements. Sometimes these checks are very strict, and sometimes the checks are lax – the bank doesn’t look very carefully or ask a lot of questions. Normally, you have to also pay a percentage of the value of the mortgage. So if the house you want to buy is £100,000, you might have to pay a 20% deposit up front and the bank then gives you a mortgage for the remaining £80,000.
One thing that can make getting a mortgage difficult or easy is how much deposit is required. In the UK, at the height of the housing boom, people only needed 5% deposit and often no deposit at all. In fact, sometimes the bank lent more money than the property was worth in the belief that property prices would continue to rise! Now 20% is usually required and a lot of people can’t afford it or have to save for years to have enough for a deposit on a flat. Usually a bank will lend two or three times your income. Sometimes they make it easier by lending four or five times your income instead. Finally, when you find your house or flat, you need to get a survey of the property done, to check that the house is in good condition and is worth what you’re paying for it. You usually also have to pay a fee for the survey and a fee to bank to set up the mortgage. and a fee to a lawyer to check the contract and organise the transactions. It all adds up and makes getting a mortgage expensive and difficult.
Cover the text. What do you remember?
- Say three things you can do to a mortgage.
- Why might you be thrown out of your house?
- Say four things you need to do if you want to take out a mortgage.
- Say two things you might need to show the bank when applying for a mortgage.
- Why might it be hard to get a mortgage?
Related stories in the news
In the UK, the government have asked mortgage lenders to make it easier for young people to get mortgages. They’re saying that if people who are applying for mortgages can prove they’ve been paying rent over a period of time, this should be taken into consideration and should be seen as proof that the person is trustworthy and reliable. Lots of people have paid tens of thousands of pounds in rent, but still find it really hard to get a mortgage.
There has also been a lot of talk about whether or not new restrictions should be brought in to stop people taking out what are called buy-to-let mortgages. These are people who already own at least one property, and who are buying another property as an investment. They then rent out the new property, and use that money to pay the mortgage and to make some extra money from themselves. In London, where the monthly rent you’d pay for a one-bedroom flat, say, is far higher than the mortgage repayments you’d pay on the same property, this has led to rich people buying more and more property and pushing rents up. Many people feel it’s time to try and stop this.
Finally, a new survey has found that ‘the bank of mum and dad’ is now the 10th biggest lender in the country. In other words, more and more parents are lending their children the money they need to get on the property ladder and buy their first place. As it’s getting harder and harder for young people to get a mortgage, many people feel they have no real alternative!
- How easy is it to get a mortgage in your country?
- Do most people rent or buy? Why?
- What are the advantages of renting rather than taking out a mortgage?
- Does ‘the bank of mum and dad’ lend lots of money in your country? Have you ever used it?
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In Islamic countries, as interests are religiously forbidden, many banks give mortgages without interests. You can’t easily take out one, though. You have to be highly paid. It’s really difficult to find a job, let alone a high-paying one.
Thanks for this Ameenah. I’ve been reading recently about the way the Islamic banking systems works, so interesting to hear from someone inside the system. It must be very frustrating when it’s so hard to access such funds and to get your own place.